Out of the Dark Ages (for now): Temporary amendments to the law of electronic signatures for Australian companies

Introduction

The Electronic Transactions Act 1999 (Cth) (ETA) has been around for over two decades. But it has taken just under two months since the World Health Organisation declared COVID-19 to be a pandemic¹ for the Commonwealth Government to remove (albeit temporarily) the lingering doubt that has persisted over the relationship between the ETA and documents executed electronically by Australian companies purportedly under section 127(1) of the Corporations Act 2001 (Cth) (Corporations Act) and, as a corollary, the availability of the benefit of the statutory “due execution” assumption created by section 129(5) of the Corporations Act for documents executed in this manner. This move has been welcomed with open arms by the legal and business community alike, some of whom have been lobbying actively for these changes for some time, and certainly since the COVID-19 pandemic forcibly changed the way business is conducted. 

In response to COVID-19 and the unprecedented impact it is having on the day-to-day practices of businesses, the Federal Treasurer made the Corporations (Coronavirus Economic Response) Determination (No. 1) 2020 (Determination) pursuant to powers in section 1362A of the Corporations Act. The Determination came into effect on 6 May 2020 and expires on 6 November 2020.

The Determination resolves some of the long-standing issues relating to electronic signatures and their validity for the purposes of section 127(1) of the Corporations Act. Despite electronic signatures being a common method for executing documents for at least the past two decades, the ETA (which provides for the facilitation of electronic transactions, including recording agreements in electronic form and the use of electronic signatures) does not apply to sections 126, 127 and 129 of the Corporations Act.² The Determination has temporarily amended a number of relevant sections of the Corporations Act to permit the electronic signing of electronic documents under section 127(1) of the Corporations Act.

It is important to remember that the ETA is facilitative rather than mandatory.³ An exclusion does not necessarily preclude an affected document from being signed electronically, however there are particular issues that surround execution by Australian corporations. The Determination is an important step in providing clarity in an otherwise uncertain area.

This article discusses:

• section 127 of the Corporations Act prior to the Determination;
• what has changed as a result of the Determination in relation to electronic execution of company documents (including our position on deeds); and
• the limitations of such changes and some precautionary words.

Section 127: Prior to the Determination

An Australian company can rely on the requirements of section 127(1) of the Corporations Act as a method of execution as it permits a company to execute a document without a common seal if it is signed by:

• 2 directors;
• a director and a company secretary; or
• for proprietary companies with a sole director who is also the sole company secretary, by that person.

Section 129(5) of the Corporations Act creates a statutory assumption that allows a person to assume a document has been duly executed by a company if the document appears to have been signed in accordance with section 127(1). Whilst section 127(1) is frequently relied upon by contractual parties and other persons dealing with companies, there has long been uncertainty and differing views in the market regarding the validity of:

• ‘split execution’ – for example, where one director signs a copy of the document, and the other director signs a different copy of the document; and
• electronic execution.

These issues were recently raised in a series of cases.⁴ Relevantly, in one such case, the Supreme Court of South Australia said:

Given that s 127(1) contemplates a document being executed by two officers signing it, there is good reason to consider there must be a single, static document rather than a situation where two electronic signatures are sequentially applied to an electronic document. [I]t is insufficient that two signatures appear on different counterparts or copies of the same document because no one counterpart or copy would be properly executed by the company under s 127(1).⁵

The Determination has addressed both of these issues. On this point, the Explanatory Statement to the Determination states that:

While the Determination is in effect, there is no need for a single static document in order to satisfy section 127 of the Act. The entire process of executing a document can be carried out using electronic communications, so long as a method as reliable as appropriate to the circumstances is used to identify each person and his or her intention to execute the document on behalf of the company.

We discuss the importance of these changes below, including in respect of deeds.

What’s changed?

The Explanatory Statement to the Determination states that the changes deal with “provisions about meetings and document signatures that are not compatible with public health requirements for social distancing during the Coronavirus pandemic”.⁶ The Determination therefore modifies requirements in respect of both meetings and methods of executing documents. The focus of this update is on the latter.

Electronic signatures and execution of documents in electronic form

The Determination temporarily alters the operation of section 127 of the Corporations Act to give certainty that when company officers sign a document electronically (including an electronic document),⁷ the document has been validly executed.

A company may now (in addition to other methods) execute a document without a common seal by 2 directors, a director and company secretary, or the sole director/company secretary of a proprietary company using an electronic communication which reliably identifies the person and indicates the person’s intention about the contents of the document. The reliability and identification requirements mirror those discussed below in the context of the ETA.

A new definition of “document” is also inserted for the purposes of section 127(1) of the Corporations Act which includes “a document in electronic form”, in our view removing the need for “paper, parchment or vellum” with respect to deeds.

In addition to the above, the statutory assumption in section 129(5) of the Corporations Act (relating to due execution) is now available where a document is signed electronically (including in electronic form) under these temporary measures. However, notwithstanding the above, it is important to remember that the usual proviso remains about disentitling knowledge or suspicion. That is, if one knows or suspects this assumption is incorrect then it is not available.⁸ 

Split execution

Section 6(3) of the Determination states that a company may execute a document if each person required to sign the document on behalf of the company either:

• signs a copy or counterpart of the document in physical form; or
• uses electronic communication which reliably identifies the person and indicates the person’s intention about the contents of the document.

In other words, it permits the use of ‘split execution’ (for example, where two officers of a company execute separate counterparts of a document, whether in electronic or physical form).

Importantly, the copy, counterpart or electronic communication must include the entire contents of the document. In other words, the document cannot be executed by exchanging signed copies of the execution pages only - it needs to include the entire document.

Validity of the method of electronic execution used

Section 6(4) of the Determination states that the method used for the electronic execution of documents must:

• identify the person in the electronic communication and indicate the person’s intention in respect of the contents of the document; and
• either be:
  • as reliable as appropriate for the purpose for which the company is executing the document, in light of all the circumstances, including any relevant agreement; or
  • proven in fact to have fulfilled the functions described in the bullet point above, by itself or together with further evidence.

This section is important to prevent fraud, by requiring that the method of electronic execution be reliable and appropriate to identify and indicate the person’s intention in respect of the contents of the document. This requirement mirrors the approach under the ETA.⁹

Assumptions

Section 7 of the Determination extends the statutory “due execution” assumption under section 129(5) of the Corporations Act to documents that appear to have been executed in accordance with section 6 of the Determination. This is important to allow a person to rely on this assumption when receiving a document that has been signed electronically.

What about deeds?

Australian courts have a strong, traditional understanding of a deed as being a physical instrument. This view was reaffirmed recently by the Supreme Court of New South Wales in Bendigo and Adelaide Bank Limited v Russo,¹⁰  where it was observed that “it is still the case that a deed must be written on parchment or paper.” A deed, in contrast with a contract or agreement, is both an instrument and an act (regarded as the most solemn legal act that a person can perform). The formalities, including a requirement for “paper, parchment or vellum”, can be viewed as applying to both the instrument and the act. It is for this reason that many firms (including ours) have doubted that modern electronic execution platforms and methods enable the valid creation of deeds in electronic or virtual form, or whether the benefits of sections 127 and 129 of the Corporations Act are available for such documents (although they may still operate as simple contracts if the ordinary rules for contract formation are satisfied).

The question, therefore, is to what extent (if any) the Determination will apply to change this.

Due to some imprecision in the drafting of the Determination, some have already argued that there is doubt. However, while not all practitioners agree, it is our view that electronic deeds are protected under the Determination on the basis that:

• section 127(3) of the Corporations Act states: “A company may execute a document as a deed if the document is expressed to be executed as a deed and is executed in accordance with subsection (1) or (2)”. In our view, the reference to section 127(1) of the Corporations Act means section 127(1) of the Corporations Act as modified by the Determination;
• the common law formalities governing form (that is, paper, parchment or vellum) and writing have been effectively modified in the Determination by the definition of “document” to include electronic form for the purposes of section 127(1) of the Corporations Act; and
• in any case, both the Determination and the Explanatory Statement support the position that the Determination will alter the operation of section 127 of the Corporations Act in respect of “documents”. Importantly, not a single reference is made, nor a distinction drawn, in respect of deeds. In our view, it is reasonably clear that the Determination is intended to apply to all documents executed by a corporation. It would be an absurd interpretation to say that the intention was to protect everything except deeds.

However, given that not all firms may agree on this point, where a deed is involved it would be prudent to raise the topic and proposed method of execution early in transactions where possible, so alternative views can be accommodated. It is also always worth considering if your document does in fact need to be a deed or could be just as efficacious as a simple contract.

Limitations and precautions

While a welcome step forward, the Determination is not without limitations, nor is it an invitation to throw caution to the wind when applying electronic signatures. Accordingly, precautions need to be taken, noting the following.

Temporary application

The Determination has effect for 6 months from its commencement (until 6 November 2020).¹¹ It remains to be seen whether the Government will at a later date introduce legislation to permanently implement the changes.

Only applies to Australian companies

Foreign companies and entities other than companies (for example, statutory corporations and government agencies) are not affected by the Determination, as it only applies to companies registered under the Corporations Act. This can further complicate the approach taken in relation to deeds as other parties or individuals may still have to comply with the “paper, parchment or vellum” requirement which would mandate a wet-ink signature. This is a further reason for parties to consider if their document does in fact need to be a deed. 

For deeds governed by the law of NSW, individuals (including natural persons executing under a power of attorney for a company) will have the benefit of section 38A of the Conveyancing Act 1919 (NSW) which provides that deeds, whether or not affecting property, can be created in electronic form and electronically signed and attested in accordance the Conveyancing Act 1919 (NSW) (no other State or Territory has as yet enacted an equivalent). More recently, the Electronic Transactions Amendment (COVID-19 Witnessing of Documents) Regulation 2020 (NSW), which commenced 22 April 2020, provides that witnessing and attestation may now occur by audio-visual link.¹² 

Beware of ‘cut and paste’

The Determination supports electronic execution through a variety of means. In particular, the Explanatory Statement to the Determination lists (by way of example):¹³

• execution using cloud-based platforms such as DocuSign;
• signing a PDF on a tablet, smartphone or laptop using a stylus or finger; and
• pasting a copy of a signature into a document.

However, it is important to keep in mind whether the reliability and identity requirements are fulfilled, and if the circumstance upon receiving a document give rise to a suspicion that it has not been “duly executed”.¹⁴ For example, receiving a document from someone other than the signatory, in circumstances where a signature had been ‘cut and pasted’ into a document, may give cause for suspicion.

Most execution scenarios are going to involve exchange over email or ‘use’ of an email address. It is good practice to have signatories personally email the document in question, and/or confirm when they provide an email address that will be used (including within DocuSign) that the email address is personal to that signatory and is not used by any other person. Given ‘split execution’ is also permitted now, signatories can separately sign and email.

Conclusion

The Determination is a welcome (although long-overdue) change to the requirements for the signing of electronic documents under the Corporations Act. With the Determination due to expire in November this year, it remains to be seen what will occur when that period expires.

In the meantime, the legal and business communities are embracing the flexibility the amendments provide during these uncertain times.